This country-specific Q&A gives an overview of mergers and acquisition law, the transaction environment and process as well as any special situations that may occur in the United Kingdom.
It also covers market sectors, regulatory authorities, due diligence, deal protection, public disclosure, governing law, director duties and key influencing factors influencing M&A activity over the next two years.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Mergers & Acquisitions Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/mergers-acquisitions/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
The basic legal framework for all M&A activity in the UK is provided by the English common law of contract and by way of statute, primarily, the Companies Act 2006 (the "Companies Act"), which, among other things, contains provisions relating to the conduct of takeovers and other mergers, business combinations and reconstructions.
In addition, UK public M&A is also regulated by the City Code on Takeovers and Mergers (the "Code"), a body of rules with statutory force which, broadly speaking, governs the conduct of takeovers of public companies listed on a UK stock exchange or regulated market (essentially the LSE or AIM). The Code is administered by the UK Panel on Takeovers and Mergers (the "Panel").
The Panel is responsible for the regulation and conduct of UK takeovers and must be made aware of and kept abreast of all matters related to any proposed takeover of a target company to which the Code applies.
The Code is a principles-based system, containing 38 detailed and specific rules which are framed around six key general principles. These, together, set out the standards of behaviour which market participants are expected to adhere to. It is a requirement of the Code that the rules are interpreted in accordance with the spirit of the general principles.
For those considering an acquisition of a listed UK target, the Criminal Justice Act 1993, together with the European Market Abuse Regulation set out rules intended to prevent insider dealing in target shares, together with measures intended to prevent market abuse or other distorting behaviour. These provisions are supplemented by certain provisions in the UK Listing Rules and the Code which govern disclosure of any dealings in shares in the target.
Where an acquirer is proposing to offer listed shares in whole or partial consideration for the shares it is proposing to acquire, the provisions set out in the Listing Rules and Prospectus Rules relating to the information which must be prepared (generally in the form of a prospectus) and made available in connection with such an offer will also apply.
Depending on the industry sector of the target company, there may also be other specific regulatory regimes to be observed, for example, the consent of the UK Financial Conduct Authority (the "FCA") is required in respect of any acquisition of a UK regulated financial institution. It is also worth noting that the UK secretary of state has the ability to intervene in transactions under certain limited circumstances which raise exceptional public interest considerations, primarily relating to the security of the UK or the stability of its financial system.
On larger transactions, it may also be necessary to secure approval(s) under applicable merger control rules. The application of these rules is considered in more detail at question 11 below.
What is the current state of the market?
Participants in the UK M&A market have faced significant uncertainties during 2016, relating to BREXIT during the first half of the year, and, following the vote to leave the EU, as to the implications for the UK's on-going relationship with the EU.
In addition to BREXIT, market participants have also faced uncertainty relating to the outcome of the US presidential election and the health of the global economy.
Taken together, these factors have contributed to the creation of a less certain environment within which to transact.
While the rapid devaluation of the pound against other major currencies has served to cushion the impact of this uncertainty to a degree and has helped to make UK based targets more attractive to overseas buyers, many potential investors are adopting a more cautious stance, awaiting a clearer picture of what the longer term implications of BREXIT might be for the UK and for UK based assets.
Which market sectors have been particularly active recently?
Although all market sectors have been less active in 2016 than they were in the previous year, the TMT sector has remained relatively resilient to date, buoyed by a handful of major transactions (a standout example of which was Softbank's acquisition of ARM Holdings).
The healthcare, business services and financial services sectors have also remained active during 2016, albeit not at levels experienced in the previous year. In contrast, the private equity market in the UK experienced a decrease in activity during the first half of 2016, mainly driven by uncertainty relating to BREXIT.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
The impact of uncertainty relating to BREXIT and the UK's changing relationship with the European Union can already be clearly seen in UK M&A activity levels. It is also clear that uncertainty in this area is likely to persist for the foreseeable future and it is also necessary to consider what the implications of BREXIT might be for the European Union more generally.
The question that remains to be answered is whether buyers will be willing to tolerate a degree of uncertainty (as some have done since the BREXIT vote) and return to the UK market (particularly having regard to the current weakness of the pound), or whether many will continue to bide their time, in the hope that the picture will become more clear in early 2017, once the UK has commenced formal procedures to bring about its exit from the European Union.
With London being a base for many large global companies of significant scale and inbound M&A continuing to be a prevalent feature in the market, the fortunes of UK M&A tend to be closely linked to the wider global economy. Consequently, global economic conditions will continue to be a significant factor in determining on-going levels of UK M&A activity.
With many corporates currently sitting on significant cash reserves and debt financing continuing to be relatively accessible, it remains to be seen whether a continuation of historically low global interest rate policy, taken together with continuing lower levels of organic growth and a weak pound will act as a catalyst for M&A activity in the UK.
What are the key means of effecting a merger?
The two principle mechanisms for implementing a merger of private companies in the UK are through either an acquisition of shares or the acquisition of a business and/or related assets. These are both implemented by way of private contract between the buyer and seller with the usual English laws of contract applying.
Public mergers in the UK are implemented differently, either through a public offer for the shares of a target company under the Code, or by way of a scheme of arrangement under the Companies Act and the Code.
A public offer is a form of general contract between the bidder and each of the shareholders in the target company who chooses to accept the offer. The making of public offers is governed by the Code, which prescribes in detail how such offers must be made, the information that must be provided to target shareholders and the manner in which it must be provided, together with a timeline to which such offers must be executed. The Code also prescribes the conditions which may be attached to such an offer and lays out a detailed framework for dealing with competing bids where more than one party is interested in acquiring the target.
A scheme of arrangement is a court approved, statutory process, by which a company and its shareholders reach an agreement as to a particular course of action (in this case, the sale or transfer of their shares in the target to the bidder). The statutory framework for schemes of arrangement is set out in the Companies Act (as supplemented by the Code). While these processes were not originally specifically designed for the purposes of facilitating public mergers, they have become a very common feature of the UK public M&A market.
As the target produces the relevant documentation and is responsible for implementing a scheme of arrangement, these processes are only appropriate for use in the context of a recommended bid.
It is generally considered that while a public offer may provide a framework through which de facto control over a target (i.e. an acquisition of more than 50% of the vote in that company) can be achieved relatively quickly, a scheme of arrangement, which is a more formal process, has the benefit of delivering complete control over a target upon receipt of shareholder approval, thus avoiding the need to go through additional procedures to squeeze out minority or irresponsive shareholders, as can often be the case following a successful public offer.
In addition to the above, companies incorporated in the UK can merge with other companies in EU member states under The Companies (Cross-Border Mergers) Regulations 2007 (the "EU Mergers Regulation"). In contrast to the processes described above, which are generally concerned with the sale, transfer or issuance of shares in a target company, mergers under the EU Mergers Regulation can be effected by absorption or by formation of a completely new entity. The mechanisms set out in the EU Mergers Regulation are not used with great frequency in the UK M&A market and a question remains as to how these mechanisms will continue to operate following the completion of any exit of the UK from the European Union.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
In the UK, a public company is required to immediately notify the market of any non-public information relating to it which, if made public, could be expected to have a significant effect on the price of its financial instruments.
Put simply, this is essentially any information that a reasonable investor would be likely to use as part of the basis for the making of their investment decisions. Certain exceptions apply to the above rule, permitting a delay in disclosure under certain limited circumstances (for example, where negotiations are currently on-going in respect of a specific transaction).
This fundamental disclosure requirement is supplemented by certain other periodic reporting requirements on listed companies, including the publication of an annual report and accounts and half-yearly financial information. In addition to the above, many listed companies go further than this, providing additional disclosure to the market on a periodic basis, such as quarterly financial statements and trading updates.
Listed targets which are themselves acquisitive or which have recently raised equity finance in the markets will most likely also have had to produce a prospectus or offer document. These documents are publicly available, thereby providing an additional level of granular detail on the target's operations and business performance.
In addition to the above and, particularly in the case of larger listed companies, there will often be some degree of analyst coverage, with periodically updated analyst reports being prepared and published on the target's business and prospects.
Listed companies are also required to disclose information regarding their corporate governance arrangements, together with the details of their major shareholders.
As a consequence, a bidder's working assumption when assessing a UK listed target will generally be that the vast majority of the material information relating to its business and operations is already available within the public domain.
In the context of a private M&A transaction, in many cases, there may be little current information available on the target. There is a requirement for private companies to file their accounts on an annual basis, together with other key information relating to their share capital, shareholders and officers at Companies House (the UK company registry), but this information will generally not be up to date and, consequently, disclosure for private M&A processes is usually a matter for agreement between the seller and potential bidders.
To what level of detail is due diligence customarily undertaken?
In a public M&A context, the level of due diligence undertaken is typically influenced by the nature of the approach which is being made to the target board.
On a friendly, recommended deal, where the target board are supportive of the merger, in addition to publically available information, the target board may be willing to provide the bidder with access to additional non-public information and/or with access to management. The level of information provided will still typically be less granular than one might expect to see on a private M&A transaction, due to the amount of relevant information relating to the target which will already be available in the public domain. Well advised target boards will typically also be circumspect in the information that they make available, due to their obligations under the Code to make equivalent information available to any competing bidder which may emerge during the process.
In a hostile situation, the bidder will typically have to make do with the information available in the public domain (as noted above) and will not have any expectation of the target board "opening its books" to them.
In the private M&A context, as noted above, it is common for a more detailed due diligence process to be undertaken. The level of detail involved will depend on the information the target is willing to make available, the bidder's attitude to DD (a strategic trade buyer may wish to conduct operational due diligence of a more granular nature than a financial buyer might deem appropriate) and whether there is an existing vendor due diligence package available.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
The directors of a company are responsible for the day to day operation of the company and are required to act in the best interests of the company.
In the public M&A context, the directors of a target company will be responsible for leading negotiations with bidders with a view to maximising the value available for realisation by all shareholders.
Although it is for the directors of a target company to decide whether to recommend a proposed bid to shareholders, it is ultimately the shareholders who decide on whether an offer will be accepted or not (either by accepting an offer, in the case of an open offer, or by voting to approve a proposed scheme of arrangement). As a consequence, target directors will generally consult with major shareholders and will, in practice, be unlikely to recommend a proposed offer if they are not confident that it will be acceptable to them.
The process of negotiating a public merger can be hugely time-consuming and, as a result, it is often the case that a target board will appoint a committee of directors to deal with the offer. The Code requires, even where responsibility for the conduct of the offer has been delegated in this manner, that each of the remaining directors of the target's board must reasonably believe that the persons to whom supervision is being delegated is competent to carry out that function and that the directors remain collectively responsible.
In addition to the above, under the Listing Rules, where a listed company proposes to dispose of a significant part of its business or a material asset (generally speaking, measured in the region of 25% or more of the overall size of the company), or is proposing to enter into a transaction with a related party, it will be necessary for the directors of the company to secure the approval of shareholders prior to consummating that transaction.
In a private M&A situation, the directors or officers of the seller will, again generally lead the process in negotiating the terms of a proposed sale. However, as is the case in a public M&A situation, it is ultimately the holders of shares in the target company that must agree to sell those shares.
An exception to the above is where a business or assets are being sold by a private company, in which case, absent any prohibition in the articles of the company or any shareholder agreement, there is unlikely to be any specific requirement for shareholder approval, although a well advised seller will often ask that evidence of such approval be provided in any event prior to closing the transaction.
What are the duties of the directors and controlling shareholders of a target company?
The Companies Act sets out the general duties owed by directors to their companies.
These duties are based on principles established through case law. The duties which are most relevant in the context of M&A activity are to:
- promote the success of the company for the benefit of its members as a whole;
- act in accordance with the company's constitution and only exercise powers for the purposes for which they are conferred; and
- exercise independent judgment.
In discharging the above duties in the context of a proposed merger, directors are required to have regard to a number of factors, including the long term implications of the proposed transaction, its impact on employees and other stakeholders and the effect on the company's longer term business prospects.
These duties can raise some challenging conflicts for directors when considering proposed bids, particularly those of a hostile nature, as these can give rise to situations where short and longer term interest may not be wholly aligned. A director might conclude, in good faith, for example, that the benefit of a bid at a premium to the company's existing share price is outweighed by the potential longer term impact on the target's business of the bid in question.
These duties are owed to the target company directly, and can only be enforced by the target company.
The Code also imposes a duty on target directors to ensure, so far as they are reasonably able, compliance with its provisions. The Code, furthermore, requires directors of a target to take responsibility for every document which is published by or on behalf of that company in connection with an offer. The directors must accept responsibility for the information contained in any document or advertisement relating to the offer and ensure that, to the best of their knowledge and belief (having taken all reasonable care to ensure that such is the case), the information contained in that document is in accordance with the facts and does not omit anything likely to affect the import of such information.
Controlling shareholders are not subject to the same duties as those owed by a director and are generally free to act in their own self-interest, subject to a general duty to not act in a manner which is oppressive to minority shareholders.
The same broad principles will be applicable in the context of private mergers, although it will generally also be advisable to carefully consider the articles of the target company and any related shareholder agreements, as these will often contain additional approval or consent rights which could be or relevance.
Do employees/other stakeholders have any specific approval, consultation or other rights?
While there are no regulatory approvals or consents that are generally required on all UK deals as a matter of course, depending on the business profile of the target company and, in many cases, the bidder, there may be specific regulatory requirements which must be complied with.
For example, the acquisition of a target company which operates in the financial services sector (or acquisition of a stake in excess of 10% therein) will likely require the prior approval of the FCA, or in certain specific cases, the UK Prudential Regulation Authority. The assessment period for a review undertaken by the FCA is 60 business days (which may be interrupted to request additional information, where required). Approval may only be withheld under circumstances where there are reasonable grounds to do so, based on the suitability of the proposed acquirer (for e.g. having regard to its capitalisation, reputation and relevant experience).
Depending on the size of the target and bidder, it may also be necessary to make merger control filings with competent regulatory authorities, For English targets, where applicable, these will be either the European Commission or, under certain circumstances, the UK's Competition and Markets Authority (the "CMA").
European Commission preapproval may be required in respect of mergers which have an EU dimension and meet certain specified turnover thresholds, where the merger could significantly impede effective competition in the European common market or a part of it, particularly through the creation or strengthening of a dominant position.
Filings with the European Commission are generally made, where possible, following pre-notification discussions with the relevant case officers and, once notifications have been submitted, there is a preliminary 25 working day review period. Upon conclusion of this period, the European Commission must either clear the transaction (potentially making such clearance conditional on certain commitments being fulfilled), or elect to proceed to a more in-depth analysis. This analysis (referred to as a Phase II investigation), takes place over a further period of at least 90 working days and tends to be particularly labour intensive.
Smaller mergers which may not qualify for review under the European Commission's merger control regime may still be subject to regulation by the CMA. Where applicable, preclearance by the CMA is not mandatory, but given the CMA's powers to impose remedies on parties to a transaction, even following completion, parties to a merger will often consider seeking CMA approval prior to closing. CMA filings will typically be made following pre-notification discussions, with the CMA's preliminary review period being 40 working days. Should the CMA determine that a more in-depth assessment is required, any such subsequent review is conducted over a period of 24 weeks.
Of course, on larger transactions, it will be necessary to conduct a similar analysis to that which is outlined above in respect of the other jurisdictions in which the target and bidder operate.
The considerations set out above apply equally to private M&A transactions.
To what degree is conditionality an accepted market feature on acquisitions?
On a public merger conducted by way of open offer, the minimum permissible acceptance condition is set by the Code at 50% of voting rights in the target. In practice, most offers are announced with an acceptance condition set at 90% (with the bidder having the ability to waive that condition down to some lower level).
For schemes of arrangement, it will be necessary to secure the approval of 75%, in value, of each class of shareholders attending and voting at the relevant general meeting.
Other than these approval-related conditions, the only other mandatory condition which the Code stipulates must be applicable to all bids is that the bid must lapse if there has been a referral to Phase II merger control investigation by the European Commission or the CMA.
While it is common for bidders to include a range of other conditions, including receipt of required approvals from other competent regulatory authorities and market specific provisions such as MACs, these may not be framed in a manner that is subjective and the threshold for invoking any of these conditions and thereby abandoning a bid is set at an extremely high level. In practice, the Panel will only permit a non-mandatory condition to be invoked under circumstances where the events giving rise to the right to invoke the condition are of material significance to the bidder in the context of the offer.
It is also worth noting that it is not permissible to include any conditions relating to the availability of financing for the bid.
In practice, this means that the level of tolerance in the UK market for conditionality on public mergers is very low. As a result, for transactions involving complex regulatory affairs or the need to undertake detailed merger control reviews, it may sometimes be appropriate to announce the offer on a conditional basis. This approach is only available following consultation with the Panel, where they have been convinced that it is unlikely that the required approvals can be obtained within the timeframes prescribed in the Code. Such conditional offers are made on the understanding that they will only be formally tabled to shareholders following satisfaction of certain specified conditions.
In the private M&A markets, there are no such restrictions and it is open to the parties to agree an appropriate level of conditionality.
What steps can an acquirer of a target company take to secure deal exclusivity?
Historically, bidders would often seek (and would frequently be provided with) contractual protections, such as restrictions on the ability of the target board to solicit alternative offers, arrangements intended to ensure that the bidder would have a right to match any competing bid for the target made by any third party and placing restrictions on the ability of the target board to agree to provide any other bidder with a break fee.
Following changes made to the Code, these measures are now no longer available and target boards are prohibited from entering into any arrangements which provide a bidder with exclusivity or other deal protection measures.
As a consequence, bidders now potentially face a less certain outlook at the outset of a proposed bid and will therefore often consider the options set out below in relation to stake-building and irrevocable undertakings as a means of making their proposed bid seem as close to a "done deal" as possible, thereby discouraging potential interlopers.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
In addition to the measures referred to in question 13 above, it was historically also common for a target board to agree to pay a bidder a break fee or work free.
Such arrangements are no longer permitted and target boards are prohibited from entering into any arrangements which provide a bidder with deal protection. This is subject to the exception that target boards are still permitted to offer break fees (to a value equivalent to 1% of the value of the target company) to a friendly bidder in circumstances where they are already subject to a hostile approach from another party or where the target board is running a formal sale process.
A bidder may sometimes consider acquiring a stake in the target in order to bolster its chances of a successful bid and also provide a degree of downside protection in case a competing bidder might ultimately acquire the target at a higher price than they were willing to offer. Such activities need to be carefully considered prior to any action being taken, both from a Code point of view, to ensure that there will be no impact on the offer price (see question 17) and also to ensure that any such dealings are made in compliance with the applicable insider dealing and market abuse rules and will not prejudice the bidder's ability to effect a squeeze-out of minority shareholders in due course.
The other common form of protection which bidders will generally seek, wherever possible, is irrevocable commitments from shareholders in the target company to accept the proposed offer, or if such commitments cannot be obtained, letters of intent/support, which can be publicly disclosed and evidence an intention to accept the proposed offer.
In the context of private share or asset sales, where there is to be a gap between signing of transaction documentation and closing, it is usual for the seller to agree to not sell or otherwise transfer the target shares or assets and to continue to operate the target business in the ordinary course.
There are no restrictions which prevent a private seller from agreeing to provide a break fee if the transaction does not proceed, however, in doing so, the relevant directors will need to be mindful of their overriding duties to act in the best interests of the company.
Which forms of consideration are most commonly used?
In UK public mergers, the following forms of consideration are most common:
- shares; or
- a combination of cash and shares.
In the UK market during the first half of 2016, cash has been by far the most commonly offered form of consideration.
Taking into account the depressed value of the pound and the continuingly ready availability of debt financing at low rates of interest, it seems likely that cash will continue to be the most popular form of consideration in the near term.
The Code prescribes certain circumstances where a particular type of consideration must be offered.
An offer must be in cash (or accompanied by a cash alternative) if:
- the bidder (or any person acting in concert with it) has acquired an interest in shares in the target for cash at any time during the offer period and within the 12 months before its commencement and the shares represent 10% or more of the shares of that class in issue;
- the bidder (or any person acting in concert with it) purchases any shares in the target for cash during the offer period; or
- the Panel decides it is necessary in order to give effect to the principal that all target shareholders should be given equivalent treatment.
The Code requires a securities offer to be made if the bidder (or any person acting in concert with it) has acquired an interest in shares in the target in exchange for securities at a time during the offer period and within three months before its commencement, and those shares represent 10% or more of the shares of that class in issue. This rule is similarly intended to ensure that shareholders in the target receive equal treatment.
The same dynamics which currently make cash a compelling form of consideration in the context of public bids are also applicable in the private markets. Similarly, unlisted paper consideration will often be of limited attraction and, as a consequence, cash generally remains the preferred form of consideration on the private side of the market.
At what stages of an acquisition is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
In the context of a public acquisition, the Code stipulates that certain announcements must be made at various stages in the transaction. These include: (i) leak announcements, where persistent market rumour or a significant move in the target share price makes it necessary to notify the market that a possible offer is being contemplated; (ii) announcements of a possible offer, where a bidder is considering the making of an offer, but does not at that stage have a firm intention to do so; (iii) announcements of a firm intention to make an offer, where a bidder is essentially committing to the market that it will make an offer for the target; and (iv) periodic announcements updating the market on the results of the offer at key milestones during the offer period.
As noted elsewhere in this note, following an announcement of a firm intention to make an offer, a bidder has a relatively short timeframe within which it must publish an offer document setting out detailed terms of its proposed offer, together with information on how such offer can be accepted by target shareholders. If the offer is to be conducted by way of a scheme of arrangement, the abovementioned offer document is substituted for a scheme document. Scheme documents are produced by the target and set out details of the proposed offer, together with the documentation necessary for the convening of the meetings of target shareholders necessary to approve the scheme.
In addition to the above, there are various provisions in the Code, the DTRs and the Companies Act which require disclosure of stakes acquired in a listed company. Details of the documentation required in connection with an offer for a target company are set out in the response to question 20 below.
Disclosure under the Code
The Code requires public disclosure to be made in respect of positions held at the commencement of an offer period (an opening position disclosure) and of dealings during the offer period (a dealing disclosure). Disclosures relate to positions and dealings in the relevant securities of any party to the offer, other than a cash-only bidder. Details of the key disclosures required under the Code are set out below:
- Opening position disclosures: an opening position disclosure must be made by the bidder (and any competing bidder), the target and any person who is interested (directly or indirectly) in 1% or more of any class of relevant securities of any party to the offer.
- Dealing disclosures: dealing disclosures apply to dealings, during an offer period, in relevant securities of a party to the offer (other than a cash-only bidder) by the bidder, the target and any person who is (or as a result of any dealing becomes) interested (directly or indirectly) in 1% or more of any class of relevant securities of any party to the offer (other than a cash-only bidder) and any person acting in concert with the target or a bidder.
An opening position disclosure must be made by way of an announcement issued on the 10th business day following announcement of a potential offer (the precise time by which such an announcement must be made varies between bidders, the target and other relevant parties). A dealing disclosure must also be made, by way of announcement, where certain specified parties have acquired 1% or more the securities of any party to the offer, within a prescribed period of such dealing having taken place.
- In addition, on an open offer, it will be necessary to make announcements at key points during the offer timeline (eg on the first closing date of the offer and on any subsequent closing dates) setting out the level of acceptances which have been received.
Disclosure under the Companies Act
The Companies Act sets out circumstances in which a person who is interested in the securities of a public company must notify the company of his interest. The Companies Act also entitles a company to investigate the beneficial ownership of any of its shares, regardless of the percentage level of ownership, by the issue of formal notices under the Act.
Disclosures of voting rights held
In addition to the regime set out in the Code, a person must notify a company whose shares are admitted to trading on a regulated market of the percentage of its voting rights he holds whenever that percentage reaches, exceeds or falls below three per cent. and, incrementally, at every one per cent. threshold (above 3 per cent.) thereafter. In addition, a person must disclose any substantial economic interests in shares, based on the same percentage thresholds as above, held through derivatives such as contracts for difference and similar financial instruments.
In the context of a private acquisition, there is generally no duty to make any public disclosure, other than such disclosure as the seller and buyer may mutually agree among themselves.
Are there any circumstances where a minimum price may be set for the shares in a target company?
In public mergers, there are certain circumstances where the Code sets a minimum level of consideration which must be offered to target shareholders.
As a general principle, unless the Panel has provided its consent, an offer may not be made for a target at a price per share that is lower than that which the bidder or those acting in concert with it paid at any point in the three months prior to announcement of the offer (the Panel have the power to look back further where they consider it necessary to do so in order to preserve equality of treatment for all target shareholders).
Where a bidder is required to make a mandatory offer (see question 24 below), the Code requires that such an offer must be made in cash or include a cash alternative. The minimum consideration for such an offer is set at the highest price at which the bidder (or any of those acting in concert with it) acquired any shares in the target company during the 12 month period prior to the announcement of the mandatory offer.
The Code also stipulates that where a bidder, or those acting in concert with it have acquired shares in the target company representing more than 10% of the voting rights of any class of shares in the twelve month period prior to the commencement of the offer period, that offer must be made for cash and may be set no lower than the highest price at which such shares were acquired.
The consideration payable in respect of a private merger is entirely a matter of negotiation between the parties.
Is it possible for target companies to provide financial assistance?
There are various facets to the English financial assistance regime, however the core rule is that public companies are generally prohibited from giving direct or indirect financial assistance for the acquisition of their shares or for reducing or discharging any liability incurred in connection with such acquisition. There are exceptions to this general prohibition but they are very restricted. The prohibition covers any gifts, guarantees, securities, indemnities or loans. Breach of this provision is an offence by the company and any officer in default and is punishable by imprisonment and/or a fine.
In contrast, a private company is generally not prohibited from giving financial assistance (either directly or indirectly) for the acquisition of its own shares. However, this does not apply to a private subsidiary of a public holding company, which would be prohibited from providing financial assistance in connection with an acquisition of the holding company.
Public companies may re-register as private companies in order to facilitate the provision of financial assistance, however the financial assistance could only be provided once the reregistration of the company has occurred.
Which governing law is customarily used on acquisitions?
Acquisitions in the UK are almost invariably governed by English law.
What public-facing documentation is it necessary for a buyer to produce in connection with the acquisition of a listed company?
There are a number of public documents that a buyer is required to prepare, publish and disseminate in connection with an acquisition of a listed company. These include:
- the various announcements required under the Code (e.g. announcement of a possible offer or a firm intention to make an offer, an announcement that commences an offer period, such as a leak announcement and periodic announcements of acceptance levels, extensions of offer etc.);
- circular to the target shareholders summarising the terms and conditions of the offer;
- where a contractual offer is being made, the offer document and, in a hostile bid, subsequent documents (including any revised offer document);
- a form of acceptance, to be used by target shareholder in order to accept a contractual offer will also be prepared and circulated with the offer document;
- in the case of an offer by way of scheme of arrangement, a scheme document (note that this document is produced by the target, with input from the bidder); and
- prospectus (or equivalent) if the bidder is offering its own securities by way of consideration.
Documents or advertisements must be prepared with the highest standard of care and accuracy, and the information contained in them must be adequately and fairly presented. Information must be made equally available to all the target shareholders.
Any document or advertisement published by a bidder should include a responsibility statement whereby the bidder's directors accept responsibility for information, to the effect that to the best of their knowledge and belief, after taking reasonable care, the information is accurate and not misleading. Where the bid has been recommended by Target directors, the offer document produced by the bidder should also include a letter from the chairman of the target board making a recommendation to target shareholders. In an unrecommended offer, if information relating to the target is included, having been compiled from published sources, the responsibility then is only to ensure that it is correctly and fairly reproduced and presented.
Potential liability may also arise for the bidder and, in certain circumstances, any director, officers or shareholders of the bidder if the offer document fails to meet certain detailed disclosure requirements set out in the Code.
Essentially it is important that any information published by a bidder or by its directors, representatives or advisers in the course of the takeover – whether orally, through the press, by formal documents or any other means – is prepared with due care, is accurate and is not misleading.
Even if no personal liability attaches to a director, it can be damaging (not to mention embarrassing) to have to correct an inaccurate or unverifiable statement publicly
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
The following formalities are required in order to document a share transfer:
- entry into an agreement for the sale of the shares between the seller and the buyer;
- authorisation and approval of the share transfer by the seller; and
- in the case of certificated shares, delivery of an instrument of transfer, typically in the English context, a "stock transfer form"; or
- in the case of certificated shares held through CREST (the UK system for holding and transfer of shares in electronic form), through a transfer instruction being submitted through the CREST system.
In addition to the above, there are a number of administrative steps that need to be completed:
- the register of members of the company must be updated, (this is the point in time at which the buyer formally acquires legal title to the shares), as well as the target's register of people with significant control (if required);
- in the case of certificated shares, stamping of the stock transfer form by HMRC; and
- following the stamping of the stock transfer form, the share certificate in the name of the buyer is issued (and the share certificate in the name of the seller is cancelled); or
- in the case of shares held through CREST, the transfer of shares to the CREST account of the transferee, following which the register of members of the company is updated by the company's registrar to reflect the change in ownership which has occurred.
A buyer will generally be liable to pay stamp duty on a transfer of shares (levied at a rate of 0.5% of the value of the shares transferred) unless the consideration for the shares is £1,000 or less, or some other exemption applies (for example, if the shares are listed on certain specified markets, such as AIM). In addition, transfers of GDRs or ETFs do not generally attract any charge to stamp duty.
Savings in stamp duty which had previously been available in respect of takeovers conducted by way of some types of scheme of arrangement are no longer available, following a recent change in the law.
Are hostile acquisitions a common feature?
Hostile acquisitions are relatively uncommon in the UK.
During the first half of 2016, none of the 20 firm bids that were announced were hostile bids.
In the English market, a combination of the protections for target boards included in the Code and precedent mean that bids either commence on a recommended basis, or, if commenced on a hostile basis, will rarely continue through to announcement of a firm offer on that basis, tending to either subsequently secure recommendation from the target's board or fall away.
What protections do directors of a target company have against a hostile approach?
The so called put up or shut up ("PUSU") regime in the UK provides the boards of target companies with significant protection against a hostile offer. The PUSU regime requires that once a potential bidder has been named in an announcement, it has a period of 28 days within which it must clarify its intentions and either confirm that it will make an offer for the target, or that it will not be doing so (in which case it may not, generally, make another bid for the same target for a period of six months).
Bearing in mind the various work streams required in order to launch a bid, this 28 day period is very short and, importantly, it can only be extended by application to the Panel with the support of the target board. This gives target boards significant leverage in negotiations with any potential bidder and has made it much harder for a target to be subjected to a lengthy period of siege at the hands of a hostile bidder.
Directors of a target company must, however, be careful in their handling of a hostile offer, as they are under a duty to act in the interests of the target as a whole and must ensure that shareholders are able to themselves decide on the merits of any potential bid. They are, accordingly, not permitted to take any action that might frustrate a potential offer, including through entering into non-ordinary course contracts or arranging for the issuance of shares/options in the target.
Institutional investors in the UK are, generally, relatively conservative in their outlook and, accordingly, tend to favour a consensual approach to mergers.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
The Code requires a bidder to make a mandatory offer where it (together with persons acting in concert with it) acquires an interest in shares carrying 30% or more of voting rights in the target (which excludes treasury shares, but, usually, includes shares which have voting rights restricted or suspended). Similarly, the Code also requires a bidder to make a mandatory offer if it (together with persons acting in concert with it) is interested in not less than 30% but not more than 50% of the voting rights in the relevant target company and there is any increase at all in the percentage level of that holding.
Such offers must be for cash consideration or include a cash consideration alternative and may only be subject to very limited conditionality.
Other than as may be set out in the articles or any shareholders agreement, there are no such provisions applicable to private M&A transactions
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
Minority shareholders in a company enjoy a range of protections, both at common law and under the Companies Act. The protections under the Companies Act are designed to provide minority shareholders with certain procedural safeguards in respect of the conduct of the company's business and also a degree of protection against conduct by the company which is prejudicial to the interests of the shareholder (as a shareholder rather than in any other capacity).
A minority shareholder may petition the courts for relief where it believes that it has been unfairly prejudiced, but such petitions are rarely brought or granted in practice in the context of public mergers, as the courts will generally take the view (unless the terms of the offer are manifestly unfair or there has been some improper conduct), that a fair offer has already been made to purchase the shares of the relevant shareholder (being the primary defence available to a majority shareholder defending such a claim).
A key consideration for minority shareholders is whether the bidder has been able to acquire in excess of 75% of the voting rights in the target. Under these circumstances, the bidder will be able to delist the target and re-register it as a private company. As many institutional investors will be restricted in their ability to own illiquid or unlisted stock, it is often the case that once a bidder has acquired or contracted to acquire in excess of 75% of the voting rights in the target and where it has expressed an intention to delist the target, the majority of the target's remaining institutional shareholders will look to sell their shares in any event.
Is a mechanism available to compulsorily acquire minority stakes?
The compulsory acquisition provisions in the Companies Act allow both a successful bidder to compulsorily acquire any outstanding shares, and minority shareholders to require the bidder to acquire their shares, subject, in either case, to certain conditions being satisfied. The provisions:
- enable a bidder, once it has acquired 90% (as regards both value and voting rights) of the independently held shares of a target, to compulsorily acquire the outstanding shares on the same terms as were set out in its offer; and
- enable a minority shareholder to force a bidder, when the bidder has acquired or agreed to acquire 90% (as regards both value and voting rights) or more of the shares of a target, to acquire his or her shares on the same terms, even if the offer has closed.
A shareholder who objects to his or her shares being compulsorily acquired has the right to apply to the Court for relief, but as noted above, such relief is rarely granted.
In the context of private mergers, minority shareholders will typically be obliged to comply with some form of compulsory transfer mechanism pursuant to the articles of association of the target company or any relevant shareholders' agreement.
Accordingly, it is generally the case that on such sales, the selling shareholder will be in a position to deliver 100% of the shares in the target company at closing.